Ever wonder what it’s like to oversee someone else’s money?
The asset management industry is a behemoth, with a collective $53 trillion under management. And it touches nearly everyone—from the ultra-wealthy investor to someone simply socking money away in a 401(k).
To find out more about what it’s really like to run someone else’s financial life for them, we spoke to Elle Kaplan, founder of LexION Capital, the only 100% women-owned asset management firm on Wall Street.
LearnVest: What exactly does an asset manager do?
Elle Kaplan: It's someone who trades and invests assets—like stocks, bonds and hard assets [such as oil, natural gas, precious metals]—on behalf of clients so that they can meet their investment goals. And those goals span the spectrum, like buying a first home, funding a child’s education, retiring or setting up charitable foundations.
How does an asset manager differ from other financial advisers?
Wall Street intentionally changes titles and makes them confusing. So by title alone, it’s hard to tell the difference sometimes. Most of the Street is simply selling products, which might be insurance or self-branded mutual funds on which they're paid a nice markup for selling. That's very different from what an agnostic asset manager does.
With an asset manager, if something ends up in a client’s portfolio, it’s because we feel that product is the best for the client. We get no benefit for recommending anyone. We must legally act in our client’s interest.
An asset manager's advice is also highly customized. You aren’t classified as the "high-risk" investor or the "medium-risk" investor. It’s an ongoing conversation because, just as your health concerns and needs might change, your financial priorities are going to change over your lifespan. Your parents or kids might get sick, you may lose your job or your might get a great bonus. Financial situations change, and your financial plans have to be flexible, as a result.
What's the top misconception people have about what you do?
Investing is often portrayed in the news as akin to gambling or speculation. But it’s not a matter of betting on a stock and saying, "O.K., that’s it." That’s gambling. That’s not investing.
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There are boutique asset management firms and behemoths with billions under management. What are the pros and cons of each?
It’s better to compare fiduciary to fiduciary and brokerage house to brokerage house. A broker will take anyone, whether you have $5,000 or $5 million. But they have products to sell, and they’ll often put those in client portfolios.
Plus, the investment advice is catch as catch can. One team might do a great job, and one team might not. The legal standard is suitability, which means they are supposed to find you investments that are suitable to your objectives. So you don’t have much recourse if an investment doesn’t work out for you.
The fiduciary world is much smaller. Fiduciaries are held to a standard that means you are legally required to act in the client’s best interest. There are fewer of them, and the minimums are generally higher. If something is in the client’s portfolio, that's because it’s in the best interest of the client.
Who's the typical client?
Most asset managers cater to the ultra wealthy—often families with $10 million or more in assets. Our minimum is set at $1 million, which is fairly typical. But we’re also tying to raise the standards of Wall Street so that more people have access to fiduciary-level asset management. Generally speaking, all of the wealthiest families in America use fiduciaries, and we want the industry to keep lowering minimums so that more people get this high level of care.
As part of that mission, we recently started LexION Access, which is for the multimillionaire-in-the-making, with a minimum of $100,000 in assets. I got the idea after meeting a wonderful young lady in her early thirties—a recently divorced, single mom who, through a lot of hard work, had saved about $100,000. And I thought, "If I’m not helping someone like her, what am I in business for? Unfortunately, we’re an anomaly among fiduciaries to have a $100,000 minimum.
What services do asset managers offer?
Typically, everything under the sun. We are very holistic, like a primary finance doctor. We’ll talk to your accountant and get a sense of your tax bracket. For higher brackets, strategies like optimizing investments on an after-tax basis become extremely important. We’ll create a portfolio just for you, for example, with investments possibly in emerging markets and developed foreign markets, and bonds that are customized for your bracket.
It’s all based on what we call goal-based investing. Just as you wouldn’t get in your car and simply hope to figure out how to drive from Manhattan to New Jersey, you wouldn’t just put money in the stock market and hope you figure out where you are trying to get along the way. It doesn’t work that way. You would get in your car with a plan and directions from point A to point B. Investing is no different.
Are there certain qualities to look for when choosing an asset manager?
Always ask: How are you paid? Are you paid by any commissions at all? And get it in writing. My firm is subject to the fiduciary standard, so we can only be paid by a fee. We can’t accept commissions. From my perspective, it’s the difference between seeing a doctor who is supposed to prescribe the best medicine for your illness versus getting a script from a drug rep.
Second, find out who custodies your assets. We’ve seen scandal after scandal—Bernie Madoff, MF Global—where the money wasn't housed separately from the advisory firm. A client should sign a limited power of attorney that allows an asset manager to trade in the account, but that’s it. No one should have access to the client’s money except one person: the client.
Third, ask if they have a Series 7. It doesn’t matter what fancy term they call themselves. If they have a Series 7, they can legally accept commissions. Are there any self-branded mutual funds? If they are selling a mutual fund branded in the company’s name, chances are that person is under pressure to sell that product.
Do you have financial tips that hold true regardless of a person's income level?
I speak a lot with recent college graduates. I know it’s hard for them because they are recent grads, so everything is suddenly really expensive, they have student debt and it seems like retirement is a gazillion years away. But I like to say that if I had a boyfriend, his name would be Roth. Compounding interest is magical. It will do amazing things. So I tell them to open up a Roth IRA or a retirement account, and put away what they can. They'll be so happy they did.
You've been outspoken about gender disparity on Wall Street. How can women—and Wall Street—address the issue?
Wall Street could do a much better job of targeting women. We are over half the population—yet we are still largely ignored by Wall Street. That's crazy. And the examples they use are awful. Pull up advertising from any Wall Street firm, and it’s "Susie just got over an emotional divorce," but "Paul is a businessman" and "Jerry has to deal with his retirement savings and provide for his wife and three kids." It doesn’t accurately reflect America.
You have a lot of women who are single, professional and high-earning who need help. They don’t come into money because of an emotional divorce; they’ve earned it themselves. We see a lot of women who out-earn their husbands, and they are in charge of the family finances. They need advice they can trust. I have no idea why Wall Street continues to fail so miserably at it, but they have.
A lot of folks—women, in particular—feel like they don’t comprehend finance, so they don’t ask questions and they feel overwhelmed by it. But if you don’t understand what someone wants to do with your money, the problem isn’t with you—it’s with them. They aren’t explaining it clearly enough, and you shouldn’t do anything you don’t understand. So if you are talking to an asset manager, and they are using a lot of confusing jargon, walk away.
How has investing changed since the financial crisis?
I wish I could tell you things have changed—that Wall Street no longer puts short-term interests ahead of people’s long-term financial security, that they won’t sell things that will potentially be toxic. But I don’t believe that really has changed.
But I do think that Main Street’s awareness of Wall Street’s practices has changed. The ruse is up. No one believes that these firms are out for everyone’s best interests. People are now very distrustful of Wall Street, which is both good and bad. A certain amount of skepticism is healthy, but it can also be an excuse not to start investing.
At the end of the day, ask yourself: What does every millionaire and billionaire have in common? They all have investment accounts. You aren’t going to become wealthy just by working. You also need to consider investing.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the people interviewed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own and are not the view of LearnVest Planning Services. LearnVest Planning Services and any third parties interviewed, listed or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.